Keynesians have some unfortunate propensities. Quick to blame insufficient private demand for economic ills, they propose to ratchet government to higher levels to make up for the supposed shortfall. That diagnosis is often debatable; the prescription may be a palliative at best and destructive at worst. A fashion among Keynesians is to invoke warnings about the dangers of deflation, a hobgoblin providing additional cover for expansionary monetary and fiscal policy. Then, the mantra of infrastructure spending is invoked, ignoring the many political, regulatory and technical obstacles to efficient execution of favored infrastructure initiatives, even as promising but disfavored private infrastructure projects are blocked. This form of activism is thus revealed as simple statist, agenda-driven politics.

John Cochrane covers these and other pathologies of the Keynesian mindset in “An Autopsy for the Keynesians.” His wsj.com op-ed might be gated, but you can also try the first link given here. From Cochrane:

“Stimulus advocates: Can you bring yourselves to say that the Keystone XL pipeline, LNG export terminals, nuclear power plants and dams are infrastructure? Can you bring yourselves to mention that the Environmental Protection Agency makes it nearly impossible to build anything in the U.S.? How can you assure us that infrastructure does not mean “crony boondoggle,” or high-speed trains to nowhere?”

Keynesians warn that policymakers must actively mitigate the risk of deflation, but there are strong reasons to believe that deflation is more friend than foe. Cochrane makes that point in this post on the CATO Institute web site, distinguishing between deflations precipitated by financial crises and those induced by gains in productivity or other positive shifts in aggregate supply, such as the current oil supply boom, which involve healthy declines in the price level

This post by Christopher Casey at the von Mises Institute discusses the monetary causes of “bad” deflations. Jerry Jordan emphasizes some conceptualizations of money as a factor of production here, noting that stable money, as an input complementary to capital and labor, tends to boost the economy’s productivity (and reduces prices):

“It is important to note that a condition of “rising purchasing power of money” is most commonly described by the pejorative “deflation.” This unfortunate custom has caused most observers to believe that a gradually falling “price level” is as bad, or even worse than, a gradually rising “price level.” Our analysis concludes there can be—and historical experience has demonstrated—“virtuous deflations” during periods of rapidly rising productivity.“

Scott Grannis asserts that the multiplier associated with fiscal stimulus is roughly zero, and evidence over the past few years suggests that he may be right. He appeals to a form of the classic “crowding out” argument: that debt-financed increases in government spending absorb private saving, leaving less funding available for private capital investment. In the present case, federal deficits ($7.4 trillion since 2009) have soaked up more than 80% of the corporate profits generated over that time frame. Profits are a major source of funds for private capital projects, risky alternatives against which the U.S. Treasury competes.

There are other reasons to doubt the ability of fiscal policy to offset fluctuations in economic activity. Transfers, which have grown dramatically as a percentage of federal spending, can create negative work incentives, thereby diminishing the supply of labor and adding cost to new investment. The growth of the regulatory state adds risk to privately invested capital as well as hiring. Government projects also offer tremendous opportunities for graft and corruption, at the same time diverting resources into uses of questionable productivity (corn, solar and wind subsidies are good examples). Many federal programs in areas such as education fail basic tests of success. Federal bailouts tend to prop up unproductive enterprises, including the misbegotten cash-for-clunker initiative. Even government infrastructure projects, heralded as great enhancers of American productivity, are often subject to lengthy delays and cost overruns due to regulatory and environmental rules. Is there any such thing as a federal “shovel-ready” infrastructure project?

In recent years, research has found that spending multipliers are smalland often negative in the long run, contrary to what statists and old-time adherents of Keynes would have you believe. Empirical multipliers tend to be smaller in more open economies and under more flexible exchange rate regimes. Of growing importance to many developed economies, however, is that spending multipliers tend to be zero or even negative in the long run when government debt is high relative to GDP. This is broadly consistent with the classic crowding-out explanation for low multipliers, whereby public debt burdens absorb private saving. U.S. government debt-to-GDP is now well above 60%, an empirical point of demarcation separating high and low-multiplier countries. Finally, some economists believe that fiscal stimulus is frequently offset by countervailing monetary tightening under an implicit policy of nominal GDP targeting. Scott Sumner describes this as the story of the past few years, as neither the fiscal expansion of the 2009 stimulus plan nor the contraction of the fiscal cliff and sequestration had much if any observable impact on economic growth.

Politicians, the mainstream press and eager Keynesian economists are seemingly always ready to pitch fiscal policy and higher federal spending as the solution to any macroeconomic problem. Sadly, that is unlikely to end any time soon, because the story they tell is so simple and tempting, and they are blind its insidious nature.

Richard Rahn explains How Congress Lost Control of Government Spending. Programs enacted decades ago have grown dramatically and keep growing, often beyond their original purpose, claiming ever-larger shares of tax revenue, leaving little flexibility to undertake discretionary spending of any kind. Rahn quotes Eugene Steuerle of The Urban Institute, author of a new book “Dead Men Ruling”:

In recent decades, both parties have conspired to create and expand a series of public programs that automatically grow so fast that they claim every dollar of additional tax revenue that the government generates each year. … Unlike reaching the moon, rejuvenating the economy, winning a war, or curing a disease, none of these permanent programs are designed to achieve goals or solve problems once and for all. Almost all of them simply maintain, and often perpetually increase, subsidies for some pattern of consumption….

John Maynard Keynes’ spoke of the lasting influence of defunct thinkers:

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Add to this the budgetary strictures imposed by metastasizing government consumption programs and we get what amounts to zombie governance.

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun